This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Separating Financial Illusion From Reality





Whether you are looking for the right time to jump into the stock market, or simply thinking of changing savings accounts, planning your next financial move can mean deciphering a constant stream of economic and investment news. This often comes down to distinguishing which information represents economic reality, and which is more of an illusion.

Here are six widely followed economic indicators, along with an assessment of how much each represents illusion or reality.

1. New highs in the stock market

This is often an illusion. For example, the stock market reached new heights recently not on the strength of record earnings, but because interest rates are unnaturally low. Think about it: According to the FDIC, rates on savings accounts recently hit an average of 0.07 percent, and money market rates were barely higher at 0.10 percent. Those paltry interest rates are forcing more and more people to consider the stock market, but if rates returned to the 4 or 5 percent range, much of this support for the stock market would disappear -- unless company earnings had strengthened.

2. Company earnings

That must mean company earnings represent economic reality, right? Yes, but with a couple of reservations. Earnings gains driven by top-line sales growth are a sign of fundamental business strength. Earnings gains due to cost-cutting reflect one-time moves that often can be detrimental to future top-line growth.

3. Consumer spending

Right now, this is an illusion. Yes, it represents actual economic activity, but too often with borrowed money. In a normal economic slump, getting people to spend, even by borrowing, is a good way to jump-start a recovery. However, in January 2013, total consumer debt outstanding reached a new all-time high. Until employment and earnings start going up, spending gains based on continued borrowing by over-extended consumers should be considered an economic illusion.

4. Consumer confidence

An illusion. Though consumer confidence figures are dutifully reported by just about every news outlet, the truth is that consumers are often confident right before things turn sour, and nervous when things are about to get better.

5. Weekly unemployment claims

Another widely reported figure that is more illusion than reality. First, weekly numbers are just too volatile to be of much use. Second, employment claims sometimes rise when the economy is getting better, as people who had previously given up trying to find work re-enter the labor force.

6. Monthly job creation

This is a pretty good indicator of reality. To be sure, the job creation numbers can give a false signal in any given month, but longer-term trends in jobs indicate whether new money is actually coming into the economy.

The difficulty of separating illusion from reality is one reason why there are both buyers and sellers in the market on any given day. It's also important to remember that illusions might dominate popular perception for weeks or months at a time, but the more you can keep your focus on reality, the sounder your financial decisions will be in the long run.

null

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG

Markets

DOW 18,111.54 +99.60 0.55%
S&P 500 2,119.86 +10.26 0.49%
NASDAQ 5,109.9590 +33.4350 0.66%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs